Why Banks, NBFCs Have Started Raising Fixed Deposit Rates

Major lenders like HDFC Bank Ltd., ICICI Bank Ltd., Bajaj Finserv Ltd. and Housing Development Finance Corporation Ltd. have raised their deposit rates this month despite surplus liquidity and growth in deposits that outstrips the increase in credit.

According to data available on its website, HDFC Bank has hiked fixed deposit rates for deposits between one year and 18 months, by 10 basis points to 5%.

ICICI Bank increased deposit rates across multiple maturities by 5-10 basis points. For retail deposits maturing beyond five years and upto 10 years, the bank will now offer 5.6%, compared with 5.5% previously.

Bajaj Finserv and HDFC have hiked their deposit rates by 10-30 basis points, across maturities, in the hopes of attracting long-term depositors.

The increase in fixed deposit rates follows an increase in market rates.

According to data collated by Abheek Barua and Sakshi Gupta, economists at HDFC Bank, the three-month treasury bill rates have risen by 20 basis points since mid-September to 3.5%, while six-month rates rose 40 basis points over the same period to 3.8%. The 10-year benchmark yield has risen from 6.16% on Sept.15, 2021 to 6.39% now.

In addition, lenders may be raising rates preempting an increase in credit demand.

According to Anil Gupta, vice president of financial sector ratings at ICRA Ltd., there is some upward movement in deposit rates across maturities because lenders require more resources amid rising credit growth. This is despite the system being in an excess liquidity scenario, he said.

As of Nov. 19, non-food credit growth stood at 7.1% year-on-year, which is the highest in two years, according to data available with the RBI. Deposit growth was higher at 9.8%.

Dhananjay Sinha, head of strategy research and chief economist at JM Financial, said credit growth is expected to rise to 8% by the end of this financial year and further rise to 10% next year.

According to Gupta, currently, there is also a tendency among depositors to place their money in shorter term deposits, as they hope to get higher rates in the future. By offering better long-term rates, the lenders may be trying to lock-in depositors, Gupta said.

Banks may be trying to lure customers to park more funds in fixed deposits by offering them higher rates as well.

During the pandemic, depositors moved away from fixed deposits into saving accounts due to the declining interest rates, said Sinha of JM Financial. This translated into a steeper decline in deposit costs than the average lending rate, facilitating a margin expansion of 40 basis points. "We anticipate a shift back to term deposits as rates cycle bottoms out."

According to data available with the Reserve Bank of India, outstanding deposits in the fortnight ended Nov. 19 stood at Rs 157.8 lakh crore. Among the deposit types, demand deposits, or current and savings accounts deposits rose 20.46% year-on-year to Rs 18.2 lakh crore. Fixed deposits reported more muted growth of 8.5% over a year ago to Rs 139.58 lakh crore.

Gupta of ICRA said the deposit rate hikes could extend to other lenders as well. "The hikes could influence other banking participants to follow suit if there is substantial peer pressure regarding deposits moving out from smaller banks to the larger ones," he said.